Inclusion on the agenda: India’s next payments evolution needs to onboard 60 million small businesses

India has leapfrogged the rest of the world in the digital payments’ revolution. Many of the innovative digital technologies that have transformed India’s payments landscape are global firsts. Driven by the government’s focus on financial inclusion, India has built the world’s largest digital payments infrastructure over the past two decades with digital transactions accounting for about 20 percent of the country’s GDP.

A variety of stakeholders—including India Stack’s digital public goods, an open API architecture, banks, payment networks, and the world’s third-largest fintech ecosystem—have come together to shore up this infrastructure. Combined with government policy support, this has fuelled the rapid rise of instant, simple and secure mobile payments. Consumers and consumer-oriented businesses have embraced UPI in particular to reach $470 billion worth of transactions in the third quarter of FY23 alone. More than 400 million people across the far reaches of India have benefited from the government’s direct benefits transfers initiatives. By 2025, 71 percent of all of the country’s transactions are expected to be digital, with 800 million unique mobile payment users.

True financial inclusion will require bringing India’s 60 million micro, small, and medium enterprises (MSMEs) into this payments’ infrastructure, especially the micro enterprises. As large corporates and financial services providers will join hands to empower small businesses to join industry ecosystem platforms, the value created from the twofold goal of financial and social inclusion will have a multiplier effect for the Indian economy.


95 percent of Indian MSMEs are currently underserved by the financial services industry. Although these businesses have begun to realise the importance of digital payments, even for digitalised payment processes, micro enterprises and retailers are cash- and check-intensive, followed by payments via National Electronic Funds Transfer (NEFT).

Upgrading the payment ecosystem will be essential to propel India’s B2B market toward a digital-first way of working. If India is to reach its goal of becoming a developed nation by 2047, these smaller enterprises will need to be brought into the fold of digital payments and organised credit.

Bringing MSMEs into the world of digital payments
India’s financial services industry is working to expand awareness and merchant acceptance of digital payments. Five moves can expedite the growth of digital payments for this segment:

Understanding MSMEs in Indian industry ecosystems. The first step lies in mapping the complex interconnections within each industry’s networks and identifying the wide range of MSMEs that support each one of these sub-ecosystems. For example, the FMCG industry will have one sub-ecosystem encompassing the many types of raw materials and semi-processed goods suppliers; another comprising the distribution value chain including distributors of different sizes, wholesalers, retailers and micro-sellers across online, offline and hybrid channels leading to the end consumers; a third comprising the different types of services providers such as technology, logistics, storage, processing, marketing, corporate support etc. The backbone to each of the sub-ecosystems, with variations across product categories and geographies, is a host of micro enterprises.

Launch ecosystem-specific embedded payments solutions. The payments solutions to address the financial needs for MSMEs who support each of the above sub-ecosystems will vary, driven by factors such as market segments, the sector’s digital maturity, available credit, and operating margins. Financial institutions will need to pivot to sector-specific ecosystem solutions, with embedded finance. Expediting digital adoption for micro enterprises will depend on the platformisation of embedded payment solutions with data-driven intelligent payment choices and payment terms that align with the needs of suppliers and buyers, depending on their liquidity situation.

Rethink outdated business models. Redesign the business model, and create pain-free processes to allow onboarding with minimal know-your-customer (KYC) documentation and lower transaction costs, which are currently an entry hurdle. Emerging technologies such as blockchain technology, the Internet of Things, and central bank digital currencies can create UPI-like security, speed, and convenience for B2B payments. And this will prime India’s roughly 80 million MSMEs to join the digitalisation journey.

Create interoperable vendor and distribution systems. Access to interoperable organisational, vendor, and distributor systems with payment transactions that communicate and exchange information in real time will help to accelerate the adoption of digital process and digital payments.

Launch education and awareness campaigns. Focused efforts are needed to educate consumers and merchants about the importance of digital payments, especially in rural areas. The value of digital payments for accessing credit also needs to be reinforced with micro merchants.

With the above bricklaying by each component of the payments universe, payments in India are on track to keep accelerating in the coming years. Once MSMEs are empowered to adopt digital payments, lenders will be able to distill deep data insights relating to their cashflow, working capital, inventory, markets, entrepreneur identification, and skills. Banks and non-banking financial companies (NBFCs) are partnering with fintechs to create industry-specific credit risk models. Creating this access to credit for the roughly 50 million small businesses that are currently being denied will go a long way toward closing India’s MSME credit gap of $380 billion. It will also bring in its wake the social upliftment of the 110 million low-socioeconomic people who are employed by these MSMEs in the form of access to affordable financial services, an ability to build assets, improved living standards, and social mobility. In turn, this will raise the household savings rate, boost investments for India, and spur progress toward the country’s Sustainable Development Goals.

Ultimately, the next wave of the payments evolution—focused on micro enterprises—will create not only financial inclusion, but also social inclusion for the whole country. The future of payments is poised to create a digitally empowered, equitable, inclusive, and collaborative India.

Shashwat Sharma and Nidhi Tiwari are Partners and Nidhi Bajaj, Principal, Kearney India.